GDP And Debt Spending – Myths of Accounting

—–There has been a “fashion” of late on the blogosphere, both left and right, to re-evaluate US economic growth in the 21st century with the “new” insights on how much the American consumer was in the red. Both the Exiled and Zero Hedge have picked up this idea. Essentially, the logic is follows: GDP is not a measure of production, but of spending (which is true, its C+I+G+{EX-IM} – here the C is spending). In the US from 2000 to 2008, huge percentages of consumer spending, some of the highest levels in history, came not from income, but from loans taken to finance the spending. As such, if you are trying to discover the growth of the US economy (as opposed to growth in spending), then you need to discount debt-financed consumer spending. Once you do that, you discover that US GDP has not grown since 1998! People often talk about Japan’s lost decade in the 1990’s – from this perspective it looks like US decided to follow Japan’s lead.

—–This analysis is not bad, by any stretch. Its a very valid point to make, that debt financed consumer spending has really gone out of control and is distorting our economic figures. This analysis, however, does not prove what people think it proves. Ironically, proponents of this view are making the same exact mistake they accuse the “official” statistics of making – forgetting what GDP measures. Most people use GDP as a shorthand for “economy”, but it isn’t that, its a shorthand for spending. This shorthand works because people have to spend money on something, on making people produce something. Spending money allows people to fulfill a need. And honestly, it doesn’t much matter where that money comes from. Sure, debt-financed spending might not be sustainable – but it still boosts production. If a million people took out loans to buy a pickup truck each in a year, it would be a woefully bad use of loans, but the US would still have to produce one million pickup trucks to meet the demand. As such, by the standard of what people want to evaluate when they say economy – how much a country produces – the debt-financed spending still boosts output. Now, a lot of this debt went into the housing bubble, which is wasteful, since it was paying twice as much as people used to for the same good – but good GDP estimates take that into account. GDP adjusted for inflation (since the rise in the price of goods would be inflation) is one such way, but the Bureau of Economic Analysis, which does the official GDP statistics, re-evaluates GDP figures form the past when changes like this occur.

—–All of this does have a larger point. All of this debt-financed spending is resulting in economic growth – its fulfilling real needs. The problem isn’t, therefore, debt-financed spending. The problem is that people lack the income to fulfill their needs. If wages, which have been hopelessly stagnant compared to productivity, were to be increased, this previously “unsustainable” level of spending would suddenly become natural. From an economic standpoint, we want people to spend (at least to a certain point) and we should be working to allow that, not working to reducespending back to 1998 levels. Phrased another way, our economic output hasgrown, but us median income has not.

—–As a final note – don’t construe this article to say that A: all debt financed spending is good or B: that GDP is a great measure of economics. A lot of debt financed spending was wasteful and foolish, while GDP as a measure has more inconsistencies than the Bible – and is worshiped about as fiercely. Im just rebutting a particular critique from a particular angle.